Tax and Business Structure advice
Choosing business
entity is very important. The taxation treatment of entities may impacted on
commercial decision such as
- Which entity is suitable for starting business
- Which entity to choose when purchase an existing business
- Which entity to choose for maximum investment growth
- Whether to buy or sell business
- Whether to operate an employee or a subcontractor
The basic tax issue of choosing business structure are tax rates, utilise of loss, capital gain and a refund of imputation offset.
The table shows the comparison between advantages and disadvantages of each business structure
(Australian residents for Tax purpose only)
Entities | Advantages | Disadvantages | Common issues |
Sole Trader | 1. A simplest structure | 1. Pay tax at marginal Rates(including Medicare Levy) | 1. Non-Commercial losses |
2. Full control of business | 2. Legally respond for all aspects of business | 2. Personal Service Income | |
3. Receive full profit from business | 3. Very weak personal assets protection | ||
4. Inexpensive to set up | 4. Responsible for losses | ||
5. Capital Gain Discount | 5. Limited Access to Capital | ||
Partnership | 1. Inexpensive to setup | 1. Pay tax at marginal Rates (Individual level) | 1. Non-Commercial Losses |
2. More people share work load | 2. Share net profit | 2. Personal Services Business | |
3. Share losses and legal responsibility | 3. Very weak personal assets protection | 3. Partner’s salary | |
4. Capital Gain Discount (Individual Level) | 4. Each partner legally respond for all aspects of business | ||
5. Does not pay tax at Partnership Level | |||
Company | 1. Pay tax on its own profits at 30% fixed rate | 1. More expensive to establish | 1. Personal Services Business |
2. Ability to claim refund of imputation offset | 2. No Capital Gain Discount | 2. Carried forward losses | |
3. Greater access to Capital | 3. Carry forward losses trapped in the company | 3. Division 7A | |
4. Strong personal asset protection. | 5. Losses can be carried back three years against profits | 4. Franking Deficit Tax | |
5. Losses can be carried back three years against profits | 6. Shareholder loan account must not be overdrawn | ||
7. Director personal respond for unpaid Super and PAYG withholding | |||
Trust | 1. Limit liability if the trustee is a company | 1. Establish and administration cost | 1. Personal Services Business |
2. Perpetual existence | 2. Carry forward losses trapped in the trust | 2. Carried forward losses | |
3. Strong personal asset protection | 3. All net profit must distribute to beneficiaries | 3. No present entitlement | |
4. Capital Gain Discount |